The story of the Baltimore and Ohio Railroad takes us back more than
ninety years. When the scheme for the construction of a railroad from Baltimore
to the waters of the Ohio River first began to take form, the United States
had barely emerged from the Revolutionary period. Many of the famous men
of that great day were still living. John Adams and Thomas Jefferson had
been dead only a year; Madison and Monroe had recently retired from public
life; John Quincy Adams held the office of President, and the "reign" of
Andrew Jackson had not yet begun.

At this time steam navigation on the rivers was only in its beginnings,
but no one could doubt that it would come into general use. Two decades
had passed since the Clermont had been launched on the Hudson by Robert
Fulton, and steamboats were now carrying cargoes successfully against the
swift currents up the Mississippi from New Orleans and were threatening
the extinction of the aggressive flatboat traffic. Great strides had also
been made in the construction of turnpike roads. The famous National Pike
from Cumberland to Vandalia, Illinois, had been in large part completed
and had done much for the opening up of the Western territory.

Canal building was likewise an extensive development of this period.
The idea of connecting the waters of the Chesapeake with those of the Ohio
had been broached by George Washington before the Revolution, and he had
also prophesied the union of the Hudson and Lake Erie by canal. He believed
that a country of such great geographical extent as the United States could
not be held together except by close commercial bonds.

The opening of the Erie Canal to New York in 1825 stimulated other cities
on the Atlantic seaboard to put themselves into closer commercial touch
with the West. This was especially true of the city of Baltimore. A canal
connecting Chesapeake Bay and the Ohio River was advocated to protect the
trade of Baltimore and the South from the competition of New York and the
East which would inevitably result from the construction of the Erie Canal
and the Public Works of Pennsylvania. But discouragements in plenty frustrated
the plan. The cost was believed to be excessive and the engineering difficulties
were said to be almost insuperable. George Bernard, a French engineer,
was of the opinion that the high elevations and scarcity of water along
the route would prevent such a canal from having much practical value.
For these reasons Baltimore believed that its position as a center for
the rapidly developing Western trade was slowly but surely slipping away.

This was the situation that led to the building of the Baltimore and
Ohio Railroad. Two men—Philip E. Thomas and George Brown—were the pioneers
in this great undertaking. They spent the year 1826 investigating railway
enterprises in England, which were at that time being tested in a comprehensive
fashion as commercial ventures. Their investigation completed, they held
a meeting on February 12, 1827, including about twenty-five citizens, most
of whom were Baltimore merchants or bankers, "to take into consideration
the best means of restoring to the city of Baltimore that portion of the
western trade which has lately been diverted from it by the introduction
of steam navigation and by other causes." The outcome was an application
to the Maryland Legislature for a charter for a company to be known as
"The Baltimore and Ohio Railroad Company" having the right to build and
operate a railroad from the city of Baltimore to the Ohio River. The formal
organization took place on April 24, 1827, with Philip E. Thomas as president
and George Brown as treasurer. The capital of the proposed company was
fixed at five million dollars.

The construction of the railroad began on July 4, 1828. The venerable
Charles Carroll of Carrollton, then more than ninety years old and the
only surviving signer of the Declaration of Independence of fifty-two years
before, said on this occasion, as he laid the first stone: "I consider
this among the most important acts of my life, second only to my signing
the Declaration of Independence." His vision was indeed prophetic.

It was determined that the first section of road constructed should
extend to Ellicott's Mills, twelve miles distant, but, owing to delays
in obtaining capital, the actual laying of the rails was not begun until
the fall of 1829, and this first section was not opened for traffic until
May 22, 1830. At first, experiments were made with sails for propelling
the cars, but it was soon found that a more effective source of power was
supplied by mules and horses. The Flying Dutchman, one of the cars devised
to furnish motive power, provided for the horse or mule a treadmill which
would revolve the wheels and make the distance of twelve miles in about
an hour and a quarter. Steam locomotives at this time were in their infancy
and, until the opening of the Liverpool and Manchester Railroad in this
same year, they had attained a speed of only six miles an hour. Horses
and mules, and even sail cars, made more rapid progress than did the earliest
locomotive. In spite of these crude and primitive facilities for transportation,
however, the traffic on the new railroad was of large volume from the beginning,
and the company could not handle the amount of merchandise offered for
transport in the first months.

Construction was now rapidly pushed ahead, and by 1832 the whole line
had been opened to Point of Rocks, with a branch to Frederick, Maryland,
making seventy-two miles in all. In 1831, steam locomotives were tested,
and one of them, the York, was found capable of conveying fifteen tons
at the rate of fifteen miles an hour on level portions of the road. This
achievement was regarded as a great triumph, and in 1832 the directors
of the road called attention to "the great increase in velocity" that had
been obtained in this way.

>From this time forward the expansion of the railroad proceeded with
a certainty born of success. A branch was built to Washington and the main
line was extended to Harper's Ferry. Beyond this point construction was
slow because financial difficulties stood in the way, and it was not until
after the panic of 1837 that further aggressive building began. But by
1842 the line was completed to Cumberland, Maryland, and by 1853, to Wheeling.
Meanwhile, the branch from Cumberland to Parkersburg, Virginia, was built.
The road now comprised a total system of more than five hundred miles and
reached two points of importance on the Ohio River, one northward near
the Pennsylvania-Ohio state line and one southward in the direction of
Cincinnati. The Parkersburg extension was of great importance because it
opened a through route to St. Louis, by means of the Cincinnati and Marietta
Railroad—which was at this time completed from Cincinnati to Belpre, Ohio,
opposite Parkersburg—and the Ohio and Mississippi, which extended more
than three hundred miles from St. Louis to Cincinnati.

Times were not the best, however, and, although much traffic was developed,
the immense cost of the extensions heavily burdened the Baltimore and Ohio
Company, while the panic of 1857 seriously embarrassed its credit. Soon
after this panic and before the company had begun to recover from its effects,
John W. Garrett, one of the large stockholders in the road and son of a
Baltimore banker, was elected to its presidency, and a new chapter in the
history of the Baltimore and Ohio began. Almost immediately following Garrett's
election, a remarkable change became apparent. Losses were turned into
gains; deficits were converted into surpluses; and soon Garrett had gained
the reputation of being the most remarkable and efficient railroad manager
in the world. He seemed to be almost an Aladdin of railroad management
for, even when he could not show increases in amount of business done,
he reported greater profits by showing lower expenses. In those days the
railroads did not furnish detailed reports of business to the stockholders
or to the public. At the annual meetings it was customary for a president
or the directors simply to announce, either orally or in a brief printed
statement, the amount of gross business and profits for the year. No such
thing as a balance sheet or detailed financial statement saw the light
of day—practically everything was taken by the stockholders on faith.
And great was their faith. When, therefore, Garrett announced large increases
in profits in years when most railroads were standing still or were incurring
losses, he was implicitly believed.

Under Garrett's management a new era of expansion almost immediately
began; work was started on the long delayed branch to Pittsburgh and plans
were laid for establishing a line of steamships from Baltimore to the leading
European ports. But the Civil War, which bore heavily on the Baltimore
and Ohio, interfered with these ambitious schemes. Early in 1861 the Confederates
took possession of a large part of the line east of Cumberland; in the
next four years important sections of the road were repeatedly destroyed
and rebuilt, as they passed into the hands of the Federal or Confederate
troops. The company, however, managed to get through without default in
its securities, and, when peace was restored in 1865, the Baltimore and
Ohio resumed its policy of aggressive expansion.

Before very long the road, with its connections constructed or purchased,
reached the cities of Pittsburgh, Sandusky, and Chicago, and further strengthened
its connections with Cincinnati and St. Louis. It acquired steamboats,
grain elevators, and docks; it constructed hotels as mountain summer resorts;
it built dry docks in Baltimore; and finally it proceeded to organize and
operate an express company, a telegraph company, and a sleeping-car company.
To carry out these ambitious plans the capital stock and debt were of course
increased again and again, and in the course of these operations a large
part of the new securities issued was sold to English investors. Notwithstanding
these great increases in liabilities, the company continued to report large
surpluses and to pay large dividends, generally ten per cent annually.
In fact, this liberal rate was, with brief exceptions, paid right through
the Civil War period, in spite of the fact that large parts of the line
were frequently destroyed and traffic was often at a standstill. With such
prosperity under such conditions Garrett's reputation as a railroad manager
naturally suffered no eclipse.

In the course of the Civil War, as already noted, through traffic routes
from New York to Chicago had been established, and in the succeeding years
the consolidations of the great competing systems into trunk lines had
taken place. The struggle of the Baltimore and Ohio for its share of Western
business led to fierce rivalry with the Pennsylvania. This competition
became so severe and intense that, in 1874, the Pennsylvania road refused
to carry the Baltimore and Ohio cars over its line to New York on any terms
whatever. Since this was the only way in which the Baltimore and Ohio could
reach New York, the situation was a serious one. Garrett retaliated by
making destructive reductions in passenger rates from Washington and Baltimore
to Western points. The cuts were soon made on other roads and affected
both freight and passengers. All the lines became involved. Passenger fares
from Chicago to Baltimore and Washington were reduced from nineteen dollars
to nine dollars, and those to New York and Boston from twenty-two to fifteen
dollars. Still the fight continued, and before the end of 1875 it was possible
to travel from Chicago to New York first class for twelve dollars and to
ship grain to New York for as low a rate as twelve cents.

Despite the fact that competition had cut earnings almost to the point
of extinction, the Baltimore and Ohio continued to report surprisingly
good profits. The company borrowed additional funds from time to time but
continued to pay the liberal ten per cent dividend until 1877, when it
somewhat reduced the rate. These dividend payments indicated, however,
a prosperity that was only apparent, and they did not greatly deceive the
bankers, for the credit of the Baltimore and Ohio weakened from day to
day. The fact is that the reports of operations inspired little public
confidence; to the farseeing, there were danger signals ahead. Nevertheless
the ten per cent dividends were resumed in 1879 and continued at this rate
without interruption until 1886.

On the death of John W. Garrett in 1884, his son Robert, who succeeded
him as president, continued the same policy of competition and aggression.
With the object of gaining an entrance into Philadelphia and through that
gateway of reaching New York, he started work on a branch from Baltimore
to Philadelphia to meet, at the northern boundary of Maryland, the Baltimore
and Philadelphia Railroad—a line which independent interests were then
building through Delaware with the intention of obtaining an entrance into
Philadelphia. The Pennsylvania interests strongly opposed Garrett's new
project and many years before had gone so far, in their determination to
block the Baltimore and Ohio from acquiring control of the Philadelphia,
Wilmington and Baltimore Railroad, as to purchase that road themselves.
Despite this opposition the Baltimore and Ohio went forward with their
plans and secured an entry into Philadelphia by acquiring control of the
Schuylkill East Side Railway, which was a short terminal road of great
strategic value. North of Philadelphia the company arranged a traffic contract
with the Philadelphia and Reading, whose lines extended to Bound Brook,
New Jersey, and also with the Central Railroad of New Jersey beyond Bound
Brook to Jersey City. Afterward, by purchasing the Staten Island Rapid
Transit Company the Baltimore and Ohio acquired extensive terminals at
tidewater on Staten Island and constructed a connection in New Jersey with
the New Jersey Central. Thus, after many years of struggle and at heavy
cost, the Baltimore and Ohio finally secured an entry into the New York
district independently of the Pennsylvania Railroad.

Both freight and passenger charges, however, were still maintained at
an unprofitable rate, and, after the death of John W. Garrett, the credit
of the Baltimore and Ohio continued to decline. Dividends were gradually
reduced and by 1888 were omitted entirely. As is usually the case, the
cessation of dividends awakened the sleeping stockholders. They began an
investigation to ascertain the whereabouts of that remarkable surplus which
had been reported from year to year and which, according to official report,
had shown a constant growth.

This investigation disclosed a startling state of affairs. Instead of
a surplus, the company had been piling up deficits year after year, had
been borrowing money right and left on onerous terms, had been charging
up millions of dollars of expenses to capital accounts—and as a matter
of fact, instead of making money, it had for the most part been losing
it. Now the company urgently needed cash, and the only way it could obtain
that essential commodity was by selling its express, telegraph, and sleeping-car
business.

During the entire administration of John W. Garrett, extending over
more than two decades, current expenditures of enormous amounts which should
have been deducted from the income had been credited to the surplus; many
millions which would never be returned had been advanced to subsidiary
lines, or had been spent, and therefore should have been put down in the
books as losses. When these facts became public, the capital stock of the
Baltimore and Ohio, which for generations had been looked upon as one of
the most secure of railroad investments, dropped to almost nothing, and
the most strenuous financial efforts were required to keep the company
out of bankruptcy.

These disclosures, towards the end of 1887, ended the first period of
active Garrett management in the Baltimore and Ohio. The directors then
turned to New York bankers for the cash that was needed to put the affairs
of the company on a sound basis. Samuel Spencer, who afterward became a
partner in the banking house of J. P. Morgan and Company, was elected president
and active manager. He introduced radical reforms, entirely revolutionized
the organization, and adopted modern methods. He wrote off the books a
large amount of the much vaunted "surplus" and he took important steps
toward the general improvement of the property.

Had the new interests been allowed to continue their efforts unmolested,
the history of the Baltimore and Ohio in the next decade might have been
very different. But the original controlling interests, the Garrett family,
still held the balance of power. As the bad bookkeeping and other irregularities
of the past naturally reflected on the Garretts, it was their interest
to suppress further investigation as far as possible; and their antagonistic
attitude toward the policy adopted by the new Spencer management was seen
in the annual election of directors in November, 1888. Only five of the
members of the board were reelected, President Spencer was ousted, and
Charles J. Mayer was elected in his place.

This second change in management sidetracked the plans for radical reform,
and little improvement resulted either in earning power or in financial
condition. The company had fallen upon evil days. The net profits did not
increase, and eight years after 1888 they were smaller than in that year,
while the debt and interest charges constantly grew. Despite these ominous
facts, dividends were paid regularly on the preferred stock and in 1891
they were resumed on the common stock. In the latter year a twenty per
cent dividend was declared "to compensate shareholders for expenditures
in betterments and improvements in the physical condition of the property,"
while at the same time the directors decided to raise five million dollars
of new capital for expenditures which would be necessary to handle the
increased traffic created by the World's Fair at Chicago.

The traffic problem continued to be a thorn in the flesh and until 1893
freight rates were constantly being cut. The opening of the Baltimore and
Ohio connection to New York had brought keener competition from the Pennsylvania
Railroad and had made deep inroads into the Baltimore and Ohio revenues.
Such conditions made even the Garrett interests feel that something should
be done, and in 1890 a "community of interest" scheme was proposed. To
control the stock of the Baltimore and Ohio Railroad, Edward R. Bacon in
New York, acting harmoniously with the Garrett family, formed a syndicate
of capitalists representing the Richmond Terminal system, the Philadelphia
and Reading Railroad, the Northern Pacific Railroad, and other properties.
The ultimate plan, which proved too visionary, was to consolidate under
one control a vast network of lines extending all over the continent.

The syndicate had made little progress toward rehabilitation when the
panic of 1893 occurred. In this year and the next the earnings of the Baltimore
and Ohio fell off rapidly and the dividend was reduced. Nevertheless, as
late as January, 1895, the directors insisted that financially the company
was in better condition than for several years and that on the whole it
was in a stronger position than at any time since 1880. But in this same
year it became necessary to stop all dividend payments; the company began
to have difficulties in securing ready money; and before the close of the
year the situation seemed hopeless. Early in 1896 Mayer tendered his resignation,
and John K. Cowan succeeded him. The new president did his utmost to obtain
money to meet the current needs, but he was unsuccessful. A receivership
and reorganization seemed absolutely necessary, and in February, 1896,
the receivership was announced.

With the property now in the hands of the courts, the opportunity at
last came to make real the reforms which had been proposed and begun nearly
a decade earlier under the wise but quickly terminated administration of
Samuel Spencer. A thorough housecleaning was now carried through without
interference or interruption. A reorganization committee was formed, with
whom were deposited the Garrett shares as well as those of the Morgan and
New York and Philadelphia interests. A full investigation of past management
disclosed that the records for the interim extending from the brief Morgan
control under Spencer to the receivership contained the same kind of irregularities
and errors of policy that had prevailed under the earlier Garrett management.
Statements of profits had been swelled by arbitrary entries in the books
and nearly six million dollars which had not been earned had been paid
out in dividends. Furthermore the company had endorsed the notes of certain
subsidiary roads to the extent of over five million dollars, and had made
no record whatever of this action for the stockholders.

As in the case of numerous other railroads, the financial breakdown
of the Baltimore and Ohio Railroad was primarily due to a bad or reckless
financial policy, for there was nothing inherently insecure in the railroad
property itself. During all the years of the Garrett regime, the company
had shared in the general growth and expansion of industry, wealth, and
population within its territory. It had been progressive in matters of
expansion and had built up its system to meet the needs of modern times.
Its trackage and equipment compared favorably with similar systems, and
most of its extensions and branches had been wisely planned and had proved
profitable. The operating management of the railroad was generally good
and it usually secured its proportion of what business was to be obtained.
But the steady increase in its debts over a number of years, its extravagance
in dividend payments, and its painful efforts to keep down its operating
expenses had so weakened the property that, when the hard times of 1893
to 1896 arrived, it was in no position to weather the storm. The only wonder
is that the management succeeded in keeping the system intact and apparently
solvent so long as it did.

The receivership at once adopted a vigorous policy of improvement. The
rolling stock had run down until it could not handle even ordinary business.
While the company had been depleting its credit and paying out all its
cash in dividends, the equipment had been going into the scrap heap. For
two years the receivers made large expenditures on equipment and roadbed,
borrowing money for this purpose; the result was that when, in 1898, the
courts surrendered the property, it was in splendid condition to take advantage
of the tide of commercial and industrial prosperity which was just then
beginning to flow throughout the United States.

While the reorganization of the Baltimore and Ohio was not so drastic
as that of many other systems which went through the courts during this
period, it was thorough enough to meet the situation. The fixed charges
were cut down radically and the stockholders were assessed in large amounts.
In all, more than thirty-six million dollars was raised by assessments
and the sale of new securities; the liabilities of the Company were greatly
reduced; and its credit was promptly restored. Formerly the Baltimore and
Ohio had been struggling under a burden of floating indebtedness, with
so little money in its treasury that it could not even put a new coat of
paint on the passenger cars and had to continue to use oil lamps to light
some of its best trains. But now the floating debt was replaced by a large
available cash capital, and as a result of the liberal policy followed
by the receivers, the equipment and roadbed were brought fully up to the
standards required for handling the traffic of the road both economically
and effectively.

With the reorganization of 1898 finished, the Baltimore and Ohio Railroad
entered a new period in its history. The strong, progressive interests
which now took control concentrated their energies on developing traffic,
increasing earnings, and rounding out the general system. They adopted
careful measures for unifying the system by adding other lines and connections
of value; they paid much attention to the improvement and development of
terminals; and they spent many millions in acquiring and expanding the
terminal properties of the company at Chicago, St. Louis, Philadelphia,
and Baltimore.

The financial history of the Baltimore and Ohio since the close of the
nineteenth century is interesting chiefly in connection with changes in
the control of the property. After the reorganization a group of prominent
financiers, including Marshall Field, Philip D. Armour, Norman B. Ream,
and James J. Hill jointly purchased a large interest in the stock. But
this purchase, while perhaps representing a dominating interest, did not
involve actual control. Soon afterward, interests identified with the Pennsylvania
Railroad began to appear in the Baltimore and Ohio, and before long the
Pennsylvania had a strong representation on the board. As a consequence,
the Baltimore and Ohio almost lost its individuality and for a time was
popularly regarded practically as a subsidiary of its old rival line.

The purpose of the Pennsylvania in obtaining this ascendency over the
Baltimore and Ohio was to regulate the soft coal traffic. Already it had
acquired dominating interests in the Chesapeake and Ohio, the Norfolk and
Western, and other soft coal properties. These purchases were merely manifestations
of that "community of interest" policy which at this time led several large
systems to acquire interests in competing lines. Several of the railroad
leaders of that time, notably James J. Hill and Edward H. Harriman, believed
that if these great systems actually owned large blocks of stock in each
other's properties, this common association would ipso facto end the competition
that, if continued, would ultimately ruin them all. The Supreme Court had
decided that the "pooling" arrangements which had so long prevailed among
great competing roads violated the Sherman AntiTrust Act; and the American
public, which now was cultivating a new interest in railroad problems,
believed that the "community of interest" plan was merely a scheme to defeat
the Interstate Commerce Act and the Sherman Act and to maintain secretly
all the old railroad abuses. These inter-railroad purchases therefore became
so unpopular that the Pennsylvania sold its Baltimore and Ohio stock. At
this time Edward H. Harriman of the Union Pacific, who had at his disposal
vast funds of the latter property which he had obtained by the settlement
of the Great Northern and Northern Pacific deal, decided to acquire control
of a system of roads in the East in order to establish a complete transcontinental
line in the interest of the Union Pacific. It was the theory that such
a purchase by the Union Pacific would not defy the law or outrage the popular
conscience because the Union Pacific, unlike the Pennsylvania, did not
compete with the Baltimore and Ohio, but was only a western extension of
that system. Harriman in August, 1906, therefore purchased nearly all the
Pennsylvania holdings in the old Garrett property and thus obtained virtual
control.

At this same time the Baltimore and Ohio had been developing a "community
of interest" plan on its own account. In the year 1908, it acquired a substantial
stock interest in the newly reorganized Reading Company, which controlled
the Philadelphia and Reading Railroad and the Philadelphia and Reading
Coal and Iron Company. It did not obtain a majority interest but, with
the Lake Shore and Michigan Southern Railroad of the New York Central system,
it now controlled the Reading system. The Reading Company meanwhile had
secured control of the Central Railroad of New Jersey, over the lines of
which the Baltimore and Ohio reached New York City.

In the following years the Baltimore and Ohio property was still further
rounded out by purchasing the Cincinnati, Hamilton and Dayton, a small
system of doubtful value radiating through the State of Ohio and, by additional
extensions, into the soft coal fields of West Virginia. New energy was
put into the expansion and improvement of the southwestern lines to St.
Louis, while the eastern terminal properties were still further improved.

The practical control of the Baltimore and Ohio remained in the hands
of the Union Pacific interests until 1913. In that year, however, the Union
Pacific liquidated its holdings by distributing them to its own individual
stockholders in the shape of a special dividend. The Baltimore and Ohio
thus became once more an independent property.

The story of the Baltimore and Ohio for the past decade has been mainly
a record of a growing, well-managed, and efficient business. It is closely
identified with the personality of its notable and efficient president,
Daniel Willard, a conspicuous example of the modern type of railroad manager.
In the earlier days of railroading, and especially in the long period which
came to an end with the death of Harriman, the typical railroad president
was usually a man of great wealth who had secured his position by owning
a large financial interest in the property. The country was full of "Wall
Street Railroad Generals." But in recent years the efficient railroad head
has come more and more to be the practical railroad man who has risen from
the ranks, who has no important personal financial interest in the property
but who is paid an adequate salary to operate a system in a purely businesslike
way. Notable examples of this modern type of railroad president are, besides
Daniel Willard, Edward P. Ripley of the Atchison, Topeka and Santa, Fe,
Benjamin F. Bush of the Missouri Pacific, and Fairfax Harrison of the Southern.

The efficient management of today is abundantly shown in the recent
record of the Baltimore and Ohio. President Willard has been unmolested
by financial interests and has been continuously backed up in his policies
by the owners of the road. As a result the Baltimore and Ohio of the present
decade has reached an enviable position as one of the great Eastern trunk
lines, comparing well with other progressive properties like the Pennsylvania,
the New York Central, the Southern, the Illinois Central, and the Louisville
and Nashville. Millions have been poured into the property in the past
fifteen years; its main lines have been largely rebuilt; its rolling stock
is chiefly of the most modern types; and its terminals and structures are
such as modern conditions demand.

Courtesy
The James J. Kelly Library of St. Gregory's University, Alev Akman.Scanned by Dianne Bean.Proofread by Stephanie Manke.